Bailouts and bonuses - oh my!

The New York Times reports that American International Group plans to pay out $165 million in bonuses today. Yes, A.I.G. - the insurance company that has taken $170 billion in federal bailout money.

The company says they cannot legally rescind the bonuses because of contractual obligations to pay them.

My reaction to this news probably falls in line with the rest of the public. How utterly ridiculous to reward the employees of a failing company that suckles at the public tit to survive.

But Edward M. Liddy, the government-appointed chairman of A.I.G., makes a good point.

“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

I have to confess that I find myself conflicted. I fully support bonuses for employees, high executive pay and whatever compensation directors choose to provide. Companies compensate employees based on market conditions and what they feel necessary to recruit and retain talent. And if they make the decision to overpay their executives, the market will punish the company, and eventually it will cease to exist, or else adjust its practices to survive.

But on the other hand - it's our money! I can't argue with those that say government gets to call the shots since taxpayer money is involved.

And herein lies the reason the federal government should not bail out private companies.

By propping up A.I.G. and other struggling businesses, the government short circuits the market. Where the market would have forced these poorly run companies to collapse and allowed their assets to migrate into the hands of people better equipped to utilize them, we now find our selves throwing good money after bad, trying to save miserably managed companies - still poorly run - and now saddled with the added burden of governmental and political interference.

In essence, we've rewarded failure. Why do we act surprised when those companies continue to operate under the same failed policies?

We need to just allow the ugly consequences of bad business run its course. Yes, we will suffer short term pain, but in the long run, we will have a healthier economy.